AlphaCat income dips for AIG on Q4 catastrophes, but full-year up significantly

Investment income earned from the operations of its AlphaCat Managers ILS unit by global insurance giant American International Group (AIG) dipped in the fourth-quarter of 2019, likely due to the impact of significant catastrophe losses during the period. But for the full-year the ILS-related income earned by AIG is seen to be building.

AIG has reported a fourth-quarter where global catastrophe loss activity impacted its general insurance arms performance, although reinsurance protection played a significant role in helping the company to profit still.

The General Insurance arm of AIG reported a combined ratio of 99.8% for the fourth-quarter and 99.6% for the full-year 2019, which were both significantly improved on 2018’s figures, as global catastrophe loss activity was lower in the last year.

AIG has reported catastrophe-related losses, after including the benefit of any reinsurance recoveries, amounting to $411 million for the quarter, which included a $233 million impact from typhoon Hagibis and $146 million from Texas tornadoes and California wildfires during the period.

These major catastrophe events will have read across to the AlphaCat ILS management unit, we assume, given the managers focus on collateralised reinsurance, retrocession and catastrophe bond investments.

But despite these, the amount of income delivered by AlphaCat Managers to AIG remained positive for the fourth-quarter of 2019, with the ILS strategies delivering $1 million of investment income and $8 million of miscellaneous income for the period.

That compares to $8 million of investment income and $8 million of miscellaneous income in Q3 2019 and in the prior year’s Q4 2018 a -$12 million investment loss and $5 million of miscellaneous income.

So the fourth-quarter catastrophe losses and potentially some loss creep from prior year events impacted the AlphaCat ILS strategies in Q4 2019, lowering the amount of income earned by AIG compared to the previous quarter. But this was still much better performance than the prior year, when the 2018 wildfires in California dented the strategies more significantly, driving that investment loss.

For the full-year of 2019 AIG has recognised $9 million of investment income and $32 million of miscellaneous income from AlphaCat’s ILS operations, so a total of $41 million for the period.

That compares to just $4 million of positive income earned across both Q3 and Q4 of 2018, due to a -$7 million investment loss and $11 million of positive miscellaneous income, after AIG took ownership of the Validus reinsurance and specialty insurance operations, so also acquiring the AlphaCat Managers ILS business.

So the $41 million of income earned across the first full-year of ownership of AlphaCat Managers is an positive boost to income for AIG.

Given the impacts of major catastrophe losses, which will have hit AlphaCat as they have hit most other managers of collateralised reinsurance strategies over the last three years, it provides a glimpse of how the income could bounce back in a period of lower loss activity.

In fact, in a good year of average catastrophe loss activity and with no further loss creep or trapped collateral to deal with, the AlphaCat Managers ILS operations could deliver as much as double the income seen in 2019, it appears.

ILS assets under management at AlphaCat Managers were static across the fourth-quarter of 2019, at $4.3 billion, $4.2 billion of which was from third-party investors.

There is every chance this increased in time for the January renewals, so AlphaCat may have more ILS assets in play than that for 2020.